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Portfolio benefits with commodities futures

Join Gavin Graham for an engaging conversation with Tim Pickering, one of North America’s leading experts in commodities trading. Gavin and Tim will leave you better informed about diversification, hedging inflation, avoiding the market crash, ESG benefits of futures and what sets up a commodities super cycle.

About the Speakers

About Tim

Tim Pickering.jpg

Tim Pickering is Founder, President and CIO of Auspice. Tim leads strategic decision making and the vision for Auspice’s diverse suite of award winning rules-based quantitative investment strategies. Tim believes that in the future, non-correlated alternative investments will be a core holding in all portfolios, regardless of investor size or sophistication. Alternatives will no longer be viewed as risky, but as conservative and prudent, given the measurable value to investment portfolios.  He is passionate about creating innovative investment strategies and products that the market needs with distribution through reputable partners at a fair price. In 2015, Tim was selected by Alberta Venture Magazine, one of Alberta’s most widely respected business publications, as one of Alberta’s 50 most influential people. In 2017, Tim was named to the University of Calgary Accounting and Finance Advisory Council and in 2019 became the Chair of the Finance Advisory Council at the Haskayne School of Business. In 2020, Tim was elected to the Board of the Calgary chapter of Pheasants Forever, a globally respected habitat organization dedicated to wildlife, land management, conservation and education.

Prior to forming Auspice, Tim was VP of Trading at Shell (North America). He began his career at TD Securities (Toronto) in their elite trading development program ultimately holding the Senior PM position for the Energy Derivatives portfolio. Outside of Auspice, Tim has been involved in grain farming in Western Canada. Through the founding of Auspice, Tim ties together a career in commodity and financial risk and portfolio management that has spanned institutional experience along with entrepreneurial vision.  

About Gavin

Mr. Graham joins SmartBe with over 30 years of experience in Canadian and international markets. A graduate of Magdalen College at the University of Oxford, Mr. Graham has directed investment strategy at numerous institutions, such as the Guardian Group of Funds in the UK and BMO Asset Management in Canada. In addition to his position at SmartBe, he serves as a contributing editor to The Income Investor, a respected online Canadian investment journal. The Gavin Graham Show is a platform for Gavin to share his wealth of knowledge with the SmartBe community, as well as engage in stimulating conversations with peers and thought leaders.

Transcript

[00:00:00] Gavin: Hello and welcome to The Gavin Graham Show sponsored

by SmartBe Investments. And we are delighted today to have Tim Pickering,

Founder and Chief Investment Officer of Auspice Capital Advisors. Tim, thanks

very much for joining us!

[00:00:18] Tim: Pleasure to be here.

[00:00:19] Gavin: The major focus of Auspice is commodities, but one of the

reasons that that's a field that you're in was because of the way that your career

started.

If you could just tell a little bit about last and why you ended up doing what

you're doing now.

[00:00:32] Tim: So Auspice, we don't just trade commodities. We definitely

have a tilt towards commodities, which we'll get into. But there's definitely that

tilt. And the way I like to describe it is commodities are the most diverse asset

class.

It's really not arguable. Cotton is not like crude is not like coffee is not like

canola. And so it creates a really unique return set and a set of opportunities for

somebody in this space. So that's why I've focused on the area. Well, we started

auspice in 2006 was when the first funds started trading. But prior to that my

background we are Western Canadian based. Calgary based. Come from

farming families, both on my mom and my dad's side. Been involved in the

farming business since I was young, also run the corporate farm here in my

professional career. Went to TD Bank, Toronto Dominion Bank, straight out of

undergrad. I did my undergrad at U of C. University of Calgary.

Went to Toronto with TD on the trading development program. Where you were

exposed to really all markets save for no real focus on specific equity markets.

But bonds and currencies and real market derivatives. And you come out of the

program and hopefully you find a desk. I ended up on the proprietary trading

desks.

So team that could effectively trade anything. And my particular focus was

commodities. If I put a timeframe on it to make it a little more clear. It was out

of the program for me was the summer of 1996. So this was the .com boom.

And here I was going to focus on commodities. No, I definitely took some

criticism for that.

People thinking that, you know, whether it was colleagues or friends or mentors

thinking I was going to focus on an area that was really a dead area. I looked at

it very differently. TD did it very differently. They looked at it like a incredible

opportunity set, like I was describing. And one that had been ignored for quite

some time on an area that cycles in terms of opportunity and volatility. While

that started to kick in, in the late nineties and early two thousands, with China

building out their infrastructure. Just one of the catalysts.

And it became a incredible time to be involved in the commodity space. Really

two core strategies in my career. Rules-based or systematic trend following or

what we call trend capture as well as volatility, arbitrage. This is an option

trader. And those things took me from TD. They took me to Shell. I became VP

of Trading on the derivative side for Shell for all of North America.

So that was originally in Calgary and then moved to Texas, came home in 2004.

And in 2005, decided to hang my own shingle. Auspice was co-founded by

myself and Ken Corner, Ken Corner and myself have now been trading side by

side for 21 years since November of 2000.

[00:03:20] Gavin: That's a good long time. Evidently you must get on pretty

well if you're able to actually sit next to somebody for over 20 years. But you've

been worked for one of the largest banks. You worked for the largest oil

companies.

And obviously that gave you a very good appreciation of the major drivers and

the major potential investors. Where did your initial investors come from?

People who've known you and believe that you were able to do a good job in

terms of that trend capture or a volatility trades? And was there, because my

recollection is that sort of the 2000s were a pretty good commodity bull market.

In fact, probably the closest thing we've seen to a Supercycle in the last 30 years

or so. Did that make it easier?

[00:03:56] Tim: You know, our background being from TD and Shell was very

institutional focused. And when I say institutional, we really traded money for

the house. We didn't have a bunch of pension clients.

We had one client, we had the bank and then we had Shell. So we really came at

this in a very naive sort of simplistic way. And the catalyst for me was, you

know, I got lucky in that I had a neighbour at the cottage and he was a

successful oil man. Is a successful oil man. You know, he took interest in what I

was doing and said he would make some introductions.

So the original money came from high net worth and family offices. And the

plan was let's go build a track record. You know, this is now 2006. We get

everything going 2007. Everything's hunky dory in the world. 2008 hits. And

that was really the proving ground was in that time of the global financial crisis

and a ton of volatility and chaos.

You know, how could we do, and that's what we were waiting to prove to

people. And in building this track record that we knew would have to be a

number of years. And so that kind of opened the door. We did extraordinarily

well in 2008, we were up 45% in the main fund and we run very little risk.

About 10, 12 volts.

It was a great number, but the wake-up call became that we, you know, we were

treated as a bit of an ATM. Investors wanted their money back because we did

so well and they'd done so poorly everywhere else. So it was a bit of a wake-up

call in terms of our business model. We partnered at that point with Some Safe

who was running Claymore ETFs. We launched a natural gas ETF.

We launched our broad commodity ETF, tactical long flat strategy, which is still

a strategy we're running very successfully today. And kind of expanded the

business model from high net worth family offices, to the retail space. From just

a hedge fund to the ETF space and then trying to cross the border of the US and

Canada.

So we started to diversify the products, client type, the geography. And have

continued to do that to this day.

[00:05:55] Gavin: No, that's a very important point because as you say,

unfortunately, if you do do well, when other people are doing badly, they will

need cash from somewhere and it's going to be the one that's still up.

And especially as they have some losses to offset against the gains, you

mentioned Some See from Claymore ETFs, and you still are running an ETF in

the states, is that correct?

[00:06:12] Tim: Yeah. So once Claymore was ultimately acquired by

BlackRock, we went down that path for a while and then moved to ETF

Management for a while to Horizon ETFs in Canada.

But again, we were trying to cross the border. So since 2012 we've had a

relationship with Direction Funds out of Manhattan. And so have run both 40

act products, mutual funds, as well as currently focused on our ETF, the comm

com ETF on the NYC. And that's based on the Auspice broad commodity

strategy.

[00:06:43] Gavin: And so how much money do you have in those strategies

now?

And secondly, how much has it been growing? Cause I understand you've had a

really remarkable growth in the last year to 18 months.

[00:06:54] Tim: Yeah. So once COVID hit, it definitely has been a growth

period for us. So in 2021, our assets doubled. I think we're fairly confident we'll

double again this year. If the first 60 days is any indication.

The assets are, you know, again they're split between our flagship O M hedge

fund, Auspice Diversified .What we do with the broad commodity strategy or

what we call the long flat tactical strategy with the ETF, as well as direct

institutional managed accounts in that strategy. And then a third strategy called

the Auspice One Fund where we put a growth equity fixed income portfolio

together with our hedge fund style protective products, all in one fund aptly

named the Auspice One Fund. So across all those assets, we are running

currently about 600 million in assets.

[00:07:41] Gavin: And you said the fact that doubled so that was around 300

billion at the beginning of 2021.

So that's remarkable. Where's most of that money been coming from, has it been

institutional or has it been largely individual investors or advisors?

[00:07:53] Tim: So our base into the pandemic had gone originally from a retail

based high net worth family office retail with the ETFs to start to transition

fairly institutional starting in about 2014.

And that was our focus all the way through 2019 into the pandemic. The

surprise of the pandemic was a extraordinarily strong response by retail.

Looking for inflation protection, commodity exposure, you know, with our CTA

style strategies, the negative correlation, the ability to provide crisis alpha in

terms of equity market correction.

So that was generally driven by retail, both Canada and the US. We look at it

this way. Typically institutional investors take a while to kind of make those

adjustments, especially with something as surprising as the pandemic. I think

the bulk of our growth going forward here in 2022, at least in terms of assets,

looks to be institutional. But retail was definitely the surprise.

You know, that covers everything from USIRAs to Canadian advisors, both

bank and non-bank.

[00:09:02] Gavin: So, as you said, the retail space is much quicker to appreciate

the excellent characteristics of you products.

[00:09:09] Tim: Well, I think they can it's I don't know if it's appreciate. I think

the institutional crowd gets it crystal clear.

But to change the policies and the asset allocation is a much longer, more

formal process versus, you know, an advisor team who's got a lot of leeway. So,

you know, the difference is that the dollar amounts are generally fairly

significant from the institutional side. The bulk of our pipeline is very

institutional based here in 2022.

[00:09:37] Gavin: Indeed, as you say, if you've got to get it through three

committees, it does take a fair amount of time. To go back to the original point

you made at the beginning of this conversation in that commodities is about the

most diverse assets. Could you expand a little bit on that? And then also why I

think you've been saying for awhile that we are probably in a commodity

Supercycle? In that we are due to have a very long run in terms of increased

demand driving prices higher.

[00:10:02] Tim: So I look at commodities and say, why commodities? So like,

why are we even discussing commodities? And I kind of break it down into four

things. One, the inflation protection side of it is inarguable. This is the best way

to get inflation protection. And in fact, if you break it down beyond

commodities and say well what strategy performs very well in an inflationary

environment? Trend following does that.

So these are just my opinions. This is well-documented in academia and, you

know, sophisticated institutional portfolio construction. Well-known. So

inflation protection is one.

The second thing is the portfolio diversification. Two levels. One, adding

commodities to a portfolio is acreative. Because general commodities are not

correlated highly to the equity market or the fixed income market.

They do something else. Then within the commodity portfolio, when we put

commodities in this one big punchbowl, the diversification within the asset

class is extraordinary. As I was saying.

Then the third thing is potential alpha generation. You know, commodities truly

offer a unique, active, trading opportunities where capable investment

managers. You know, you learn a few tricks along the way, so to speak, when

you've been doing this for 20 plus years. The part of our edge we believe is

we're very, very conservative investors. I think when people think about

commodities, or hear the term, they get nervous. They think about futures that

makes them more nervous. You know, the reality is, is what is your approach?

But Auspice, you know, with entering our 16th year, we've been running a 10 to

12% volatility.

For 16 years. So we run less volatility in our return stream than the stock market

by a long shot. And I've got half of the drawdown or half of the pullback of the

stock market. And importantly the volatility that we do experience is on the

upside. So we have bigger upside volatility, bigger up moves than we do down

moves.

It's like paper cuts on the downside, but bigger moves on the upside. That is the

opposite of the equity market. And so that's the strategy, you know, that I was

taught to employ. That we've worked on our careers to continue to do. So from a

potential alpha generation potential it looks really good. There's lots to play

with there.

And there's a fourth factor. And even two, three years ago, this one really didn't

hit my radar screen, but now it's massive. And that is the green transition.

Whether you talk about ESG and we can get into that. The commodity demand

shock that always needs a catalyst.

In this case, it was COVID. And the idea of building back better, spending on

infrastructure, but do it smarter, better, more green. And doing that in both

developed and emerging markets. It's an absolute game changer. And we

believe that, you know, the few fundamental things we say is that that

opportunity in the commodity world or a Supercycle is far greater than it was in

the early 2000s.

In the early 2000s you had two things. You had an under investment in the area

because of its cycles. And two, you had China. This time it's the whole world in

the trillions in infrastructure spending that is just a reality in some fashion. Is tip

to tail of the world. And then you layer on this green side of it.

You can't build back better. The first world's built. And you need commodities

to build whether it's a, you know, an EV or wind turbines, whatever the case

may be. That is the big, big thing. And when we think about the basic

ingredients of a commodity Supercycle, we think of two things.

One there's been an extended period of underinvestment in supply. And

commodities have been through that. We can look at CapEx in oil and gas or

mining, and it's been in decline since peaking in about 2012. So a decade of

under investments, that's your first thing that's a catalyst. Your second thing is

you need some sort of generational demand shock, something that spurs things

on. Well COVID became that thing, you know, and then you look at other

things.

Well, everybody's on their heels. Comodoties have been stripped out of many

portfolios, whether it's a retail or institutional, because it wasn't performing. It

was old school, all these reasons. And now everybody's scrambling and looking

for this type of exposure. We see it as a huge opportunity. There's no getting to a

carbon neutral world or a better place without commodities.

You have to use commodities. Now there's going to be winners and losers. And

maybe over time fossil fuels will become lesser part of that. But even if they

become a lesser part of that, The volatility associated with that is probably

going to remain pretty high and the opportunity for alpha. So we look at the

whole set for the next sort of 5, 7, 10 years as you know, really a generational

opportunity.

[00:14:55] Gavin: No. I mean, that's a very important point because obviously

people are looking at it and going. Would it be fair to say that maybe people

hadn't joined up the dots and saying, oh, if we are going the green route, if we

are going for EVs, which require four times as much copper for each vehicle as

conventional cars, if that stat is correct, then you're going to need a whole bunch

of product?

And where's it going to come from? Has maybe not been some joined up

thinking there? Should people be as surprised as they seem to be?

[00:15:21] Tim: Well, I think it's just caught them off guard, but, I mean, I think

what's starting to be recognized, you know, in general is that if we are moving

towards this greener future and we're going to focus on our name and we're

going to make it policy and we're going to mandate it, that that in itself until

technology catches up and it takes time, that's inherently inflationary.

Right? So all these things point back to commodities. So you're right. I think it

was pushed aside. And even ESG, you know, commodities in general and ESG

have-

[00:15:52] Gavin: Very low scores.

[00:15:53] Tim: Yeah. Low scores. People say ESG while commodities are bad.

Our stance has been well that that depends. So we released a white paper this

past fall.

We've had an extraordinary response to it. And that's basically looking at

commodities and inflation in the context of commodity futures and ESG. Put

that all together and say, you know, of the ways we can invest in this area, you

know, resource equity and debt, you know, we've had plans divesting out of oil

and gas companies and anything related. But is there a way to be more neutral

about it?

And the reality is futures do not affect consumption or production. They affect

exposure to risk. And those are fundamentally different things. And so if you

want a ESG tilted way to protect your portfolio, instead of resource equity, there

is another big option. And that is commodity futures who are inherently carbon

neutral.

So for us, you know, we'd looked at this issue, it comes up all the time on an

ESG perspective, obviously for everybody. And so the white paper we released

in the fall has now been reprinted. I think I republished by five or six groups

including JP Morgan, AIMA, Kaia, the list goes on and on because I think

nobody had tackled this issue.

We immediately put commodities into this bad old school, non ESG camp. And

the question is well that depends how you go about it. And so this is another

big, I think, wake up call actually for institutional investors.

[00:17:26] Gavin: And obviously one aspect of it is if we are going to be

building back better, if we are going to be getting to a greener future, and we do

require a large amount of commodities.

Firstly, as you make the point, the commodity futures are a much more

responsible way of accessing it. But secondly, In terms of security of supply that

obviously is an issue. And one doesn't want to be too time-specific specific with

what's happening with the Ukraine at present, but it does surely raise the point

or that there are geopolitical factors in terms of accessing what we need.

[00:17:58] Tim: Absolutely. Absolutely. I mean geopolitical, but even, you

know, sort of common sense ones. It's like, okay. So when we focus so much on

ESG and environmental issues and have some of the best technology in the

resource extraction world, whether it's oil and gas or mining or whatever here in

Canada, you know, why are we importing product?

Whether it be oil and gas or other from places that don't believe in ESG, but

don't believe in human rights. And so, you know, I think it's high time to cut off

Russia and some of the Middle East and be smarter.

[00:18:30] Gavin: And that would obviously imply a good outlook for

Canadian resource producers and other countries, which have rule of law and

security of supply.

[00:18:39] Tim: I think Canada, you know, if we can kind of get our act

together so to speak, I think is in the driver's seat. Or has the potential. Because

we do focus on those things and we do have some of the best practice, if not the

best many will argue from an environmental perspective, in terms of resource

extraction and management. Commodities and resource extractions are

inherently invasive process.

But if you're going to do it, then do it right. And have policies around that. And

then, and this is probably one of the most important things, which we've, you

know, haven't done a very good job of it in Canada is get those commodities,

sell them for the best price. So that means they have to have access to the global

markets instead of just selling them to big brother south of the border.

[00:19:23] Gavin: Who doesn't seem to be particularly keen to permit access or

increased access in terms of pipelines and the like, absolutely. Could we talk a

little bit perhaps about the commodity product in terms of the way that it's

performed, especially in the recent environment with obviously fairly strong

rises in commodity prices? Has it been doing what it's intended to do?

Evidently it has, because you've got lots of your money in, but what does that

result in terms of performance?

[00:19:48] Tim: Sure. What is the product? So the product is the COM ETF. It's

in partnership with ourselves and direction funds. Part of the Auspice broad

commodity ETF. It tracks the underlying strategy is called the Auspice broad

commodity strategy, which is a long flat trend following approaches approach

across a basket of commodities. And so what is it trying to do? It's trying to

participate in commodities that are moving higher, and if they're not to protect

that exposure and go to cash.

So it's long or in cash, depending on the market. Not all commodities. Not all

commodity sectors. You know, for example, we're not going to be long the

entire energy sector. We'll be long the commodities within the energy sector that

are moving higher. And so that overall approach is just being disciplined. We

want to participate.

We want to capture trends and we want to protect first and foremost, the

downside exposure. Downside that is inherit. Commodities aren't a one way

street like most assets. And they will rise and then they will fall. And what can

you do to protect that? You know how'd the last couple of years go? Well, as

we've rolled into 2020, out of 2019 pre pandemic, we'd never heard the word

COVID.

There was starting to be a buzz around commodities. It was a big asset

allocation push for a big groups like JP Morgan and Goldman Sachs. They

started to see that these commodity markets globally were in deficit, under

supplied, and this could potentially be the part of a cycle. Well we rolled into

January of 2020, and commodities started to sell off.

You know why was that? Well, because the world was seeing this before, even

north America was, that there was something going on. They started to

recognize that in China. So commodities started to drop off. So our strategy

pulled back a bit, but over the course of the first 90 days, actually first 60 days

mostly, of 2020 we're peeling off that risk.

Commodities are starting to go back down. Let's take that risk off. By the time

we got to mid-March when everything dropped equities, commodities, you

name it we were already in cash. Right? So we were completely protecting the

downside. Then we me sit in cash. That occurred for about four weeks. And

then we started to add back.

So the first thing that came back was gold. Then we start to add more and more

markets as we hit Q3. Ironically, by the time we got to the end of Q3 of 2020,

we peeled gold off because it wasn't going anywhere. Right? So it was

languishing, yet we had everything else in the portfolio as a long exposure.

And then here's the difference. If you look at the performance of say the

Goldman Sachs commodity index or the Bloomberg commodity index, a basket

of long exposures. You know, they dropped and then they came back. But by the

end of the year, they were still negative. Whereas for us, by protecting that

downside and participating earlier, ended up with a positive year.

It was about 6% in 2020. We went on in 2021. You're now into a, you know, a

tactical commodity, maybe a bull market. It's definitely moving higher. There's

definitely more volatility. We ended up over 28%, almost 29% in 2021. I think

we're up about 9% or 10% this year. And so it's again, it's taking an exposure in

something that has upside momentum.

That's a physical property. It's got trend. And if it doesn't continue to go up, then

you want to take that money off the table and reduce your risk. And so that's the

overall approach is a disciplined tactical trend-following based way to

participate in commodity upside while limiting the downside.

[00:23:25] Gavin: No, that's a very clear explanation. Thank you Tim. Actually,

are you putting gold back in again now with a little bit of a momentum coming

back into it?

[00:23:32] Tim: Gold has been put back into the portfolio. Yeah.

[00:23:35] Gavin: No, that makes sense. So do you play any distributions? Are

there realized capital gains or things like that? And if so, presumably as a US

ETF then the tax treatment will be similar to other such products.

[00:23:45] Tim: There are distributions on that product. You know, to have

interested parties check carefully, given it to US product with various

treatments. But there was a distribution in December, and it's just part of how

that system works. But yet that does occur, especially on extraordinary gains,

but know it's kind of like taxes. It's a good problem to have.

[00:24:04] Gavin: It is. Because you can't pay capital gains tax if you don't

have a capital gain. And by the way, especially in Canada, at least it's amongst

the lower tax versions. Although, as you say, people should check with our own

advisors. So it's worked pretty well. If we are in a major long-term secular bull

market, as you're suggesting, I think with a sort of 5 to 10 year horizon,

presumably one would anticipate that in general you are going to continue to be

long.

Those commodities look good trends. But at the same time, where you were in

2020 to actually take it all off the table if you do get a sudden downtown.

[00:24:37] Tim: That's, you know, it's a very disciplined, agnostic approach.

We're not trying to second guess the fundamentals.

I mean, you know, again the fundamentals can get out of whack with price and

the way markets move. We're accepting that, you know, we just, we believe in

the market and we believe in having commodity exposure, but that's as

fundamental as it gets. We're only going to own those things that actually show

physical movement higher. And the ones that come off it's because they're not

going higher. It's that simple.

[00:25:04] Gavin: But you mentioned the very broad range of assets within a

commodity basket. None of that of course does include soft commodities, which

are generally pretty hard to access through the equity market. And an area that

most people probably aren't that familiar with yet at the same time, especially

with rising living standards and rising natural disasters, that it does seem as

though the prospects for those are quite attractive.

What sort of percentage might you have in the softs or does that change fairly

rapidly depending on circumstance?

[00:25:32] Tim: It will change. I mean, the big sectors that we include in the

portfolio are energies, AGS, where we include both softs and grains and then

metals. The strategy is focused on 12 commodity markets.

So it's fairly concentrated. So we include gasoline, heating oil, natural gas, and

crude oil. And then in the Ags it's soybeans, corn, wheat, cotton, and sugar

being the softs. And then metals are silver, copper, and gold. You know, each

one of those components has the ability to be about one 12th of the risk.

So it is a concentration for sure. We've picked those commodity markets

because they're scalable. They have liquidity. As the strategy grows and, you

know, we've been there before, again, ran very big portfolios at Shell. We know

where these limits are and they're a long way from where we are. It's got enough

diversification without getting into some markets. And we get asked all the

time, you know, do you have lithium? And do you have cobalt? And you know,

do you have this and the other thing. The reality is there isn't the liquidity in

those things to employ the strategy that we do.

[00:26:34] Gavin: And that's a very important point because obviously you're

going, oh only gold, silver and copper, as far as metals, you know, what about

aluminium?

Or what about nickel or whatever, but the answer is it's all comes down to

liquidity if you can't scale it in and out.

[00:26:47] Tim: It comes down to liquidity. It comes down to execution. I

mean, a lot of those markets are traded on the LME. There's timeframe

constraints for ETFs. This is a North American ETF. So we have to put all of

those things into that consideration set.

Again, the first ETF we launched linked to this strategy was 2010. So our track

record in ETFs, under various brands and managed accounts, goes a long way

back. We've been through many opportunities, many cycles, many crises and we

know how it behaves and we know how to manage.

[00:27:18] Gavin: Well that's a pretty, obviously, a very good track record, but

also a good reason for not having more esoteric perhaps or illiquid. Is there any

possibility that you might expand that?

[00:27:28] Tim: Absolutely. Absolutely. I mean, you know, when you bring up

like aluminum.

[00:27:31] Gavin: Sorry for the British accent.

[00:27:34] Tim: That's all good. I love it. The answer is yes. As those markets

become more liquid, you know, if you go back in my career from a commodity

trading perspective, you know, I picked up the phone and phoned the floor of

whatever exchange, the NYNEX, the CME. It's all electronic now.

So even that electronic trading is making certain markets more liquid, more

accessible, meet our criteria. In terms of potential portfolio inclusion. And so

that may evolve definitely, you know, in our research purview, no changes

imminent. But it could happen. And it all depends on market, the access, and

the liquidity.

[00:28:11] Gavin: No, that again makes an immense amount of sense. You

mentioned the commodity, the long flat one, but you also mentioned that you've

got a couple of other products. Would you briefly like to expand on those?

[00:28:20] Tim: Sure. So our flagship fund, Auspice Diversified is a, you know,

categorized as a hedge fund or if you want to get really granular, a CTA

commodity trading advisors style fund.

We run about 75% of the risk in commodities. We do have exposure to equity,

indices, currencies, and interest rate futures in that portfolio. In general, about

two thirds of the risk is in trend following or what we call trend capture. That

track record goes back to 2006. First full year was '07.

So entering our 16th year here. And what is the goal of that strategy in general?

It is to provide a positive, absolute return. So first and foremost we want to be

positive. But a negative correlation to equity markets. So with 15, 16 years of

track record, we have about a minus 0.15, minus 0.2 correlation to equities.

So positive return. Negative correlation and positive skew. Meaning those

upside moves. The volatility is on the upside versus the downside. The equity

market is negatively skewed. The equity market grinds higher. And then when it

drops, those moves down are bigger than the moves up. That's called negative

skew.

We're the other way. So when you put those things together, it's an extremely

good complement to pretty much any portfolio. It's not only negatively

correlated to equity, it's negatively correlated to fixed income. It has no

correlation to private equity, real estate, infrastructure, private credit. It's a

complete own animal.

And so this is why this area has been heavily focused on by institutional

investors. They can do more of those equity things, private equity, real estate,

infrastructure. If they have something that has their back. Something that

performs well in these risk-off or crisis events. You know our claim to fame in

that area is not only a positive return in a negative correlation.

But at times of crisis, we've performed very well, whether it was the global

financial crisis, or as recently as, you know, Q1 of 2020. Stock market pulls

back 25, 30%, we were up 7% in Q1 of 2020. That's our job. And so provide a

positive return with a negative correlation. That is the most acreative thing an

investor can add to their portfolio is that profile. Whether it's our horse or

another one, if you can provide a positive return and a negative correlation,

scientifically, mathematically, that is the most acreative thing you can add to a

portfolio.

So that's what Auspice Diversified does. The broad commodity strategy we're

talking about is the long flat commodity only. And then we launched a new fund

in 2020 called the Auspice One Fund where we put it all together in one fund.

Where you've got that protection from our hedge fund portfolio. And we run a,

what we call a growth portfolio. a balance between fixed income and equity.

That growth portfolio is split between half passive, global asset allocation using

ESG, sensitive ETFs, and gold. So that's a passive allocation on half of the

portfolio. So the passive allocation is long. And on the active side, we're using

that same long flat overlay we use on the commodity side, the broad commodity

strategy. To peel off that risk.

So let's replay the last 60 days. We come into January, the equity market's going

up. We were tilted not only long passively, obviously, but long in the tactical

equity and fixed income portfolio. As we got into January, we started to quickly

peel off that risk. So we start to reduce our equity risk in the growth and

foundation portfolio.

And then on the protective side we're kicking in the other way. So it was also

positive in January and very positive here in February. So you're giving the

equity upside we all want with a full downside protection from the hedge fund

portfolio, all in one fund.

[00:32:16] Gavin: That's a very neat idea. And is that available only in the US

or is that available to qualified investors in Canada?

[00:32:23] Tim: So both Auspice Diversified and the One Fund are available as

mutual fund trusts to accredited investors in Canada. And ideally, and hopefully

fairly soon, as a liquid alt.

[00:32:35] Gavin: So that's been an excellent introduction to Auspice and the

way that you run money and the reasons you do the things that you do. Is there

one major takeaway you think investors , or people who are listening to the

podcast, ought to have in their minds from your many years of experience in the

commodity markets?

Because it's fairly evident, I think, from what you've been saying that you do

think we're in the middle of a major move. And a major move that's likely to

continue. Could you give some feel for how long you think it might be going?

[00:33:04] Tim: I think we're probably inning three of a nine year inning

ballgame.

So I think there's a lot of runway. I think, you know, and again, it's not just

opinion there's science around it. I think if inflation is your worry, and it should

be, the best way to protect yourself from inflation is really twofold. One,

commodities. And two, trend following. That's well accepted. You can look at

other things.

But they may not work as well. And I'll give you an example. I mean, you

know, we talk about tips, right? So tips, you know, have an inflation component.

Well, they haven't kept up. They went the other way in January. So, you know,

be careful what you wish for, if you're going to get the effect you want from the

tool. Some people have said, well, you know, Bitcoin or crypto is an inflation

hedge.

There is zero evidence that it is. The last one is gold. Gold has been talked about

as an inflation protector. We do not include gold passively in the one fund

because of inflation protection, not one iota. Gold is a diversifier. Gold is not an

effective inflation hedge. We were out of that market for the bulk of the time

since the pandemic hit. Only adding it recently, but even there the effects been

fairly marginal.

So what I would say is inflation's a worry, find a commodity way to get that

exposure. Now, ideally, a risk managed tactical approach that's based on

discipline, you know, is the way to go about it. And you can either use

something like our long flat calm ETF, which is a nice tool to use, or if you

want to go beyond just the inflation and the commodity upside, and you want

that downside protection when the equity market inevitably corrects and drops,

that's what Auspice Diversified does. We, you know, we're not now playing

with one arm behind our back. Right? We can go long. We can go short. We can

be in the financial markets. We can be in the commodity markets. But with that

same discipline. Now you've given yourself the inflation protection.

You're open to the commodity cycle, but you've got crisis alpha in downside

protection. And so that's, you know, that's what our flagship fund does. Then if

you want to put it all together and balance those things out, that's what the

Auspice One Fund does. You know, again, that there's lots of horses in the race

and, you know, I'd encourage people to look at track record. A lot of people

think they're commodity experts. There's very few, very few in Canada, very

few in north America with a ton of experience. We're happy to talk to investors

of all types.

[00:35:32] Gavin: Excellent. Thank you very much, indeed. Because I think

that does give a very clear view of both the way that you run money and the

reasons you ought to have some exposure to commodities.

And if you can do it in a vehicle, that's got an excellent or vehicles that have

excellent longer-term track records and perhaps most importantly control the

risk. Because obviously when you get exciting occasions, like we're having at

present then obviously it does make people feel a lot better.

So thank you. And we hope we'll have the opportunity of speaking again in the

not too distant future.

[00:36:01] Tim: Sounds great. Thanks for the opportunity and have a great day.

[00:36:11] Gavin: Thank you very much for listening to The Gavin Graham

Show sponsored by SmartBe investments. If you would like to learn more about

the subjects discussed today, please go to our website at smartbinvestments.com

or @smartbeinvestments on any social media platform.

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